The A$ winner’s curse: welcome to the economy’s new normal

Welcome to the new normal: where the Aussie dollar is high, interest rates are low and Australia seems like the safest investment going around (even if Joe Hockey tried to terrify investors).

Suck it up Australia (especially the headline-seeking economic chatterers) and get used to what’s remaining for the years ahead: a high dollar, trend economic growth, sluggish employment, low interest rates and a misplaced feeling that things could be better.

This isn’t Crikey talking, its the Reserve Bank again telling us the reality of the country’s economic performance. According to yet another speech from a senior RBA official, this time deputy governor Phil Lowe in Sydney last night, what we have been experiencing is the “new normal”:

“The general point here is that there is a recalibration going on regarding what is considered normal. Having consumption, credit and asset prices grow broadly in line with incomes should probably be viewed as usual, typical or expected. So too should the rate of increase in our living standards being determined by productivity growth.” (His emphasis.)

But don’t depend on the media or many of the commentariat to relay that view. There are no front page “exclusives” or penetrating commentaries in an economy where growth will match or closely track population growth, where consumption, credit and asset prices will grow as income grows.

Lower commodity prices and a 13.7% drop in our terms of trade (which still remain well above the levels of the 2008 boom), sluggish domestic demand and weak employment, along with 1.75% of rate cuts in the past 13 months, should have combined to push the dollar under parity with the US currency. But no such luck. Australia’s reputation for good economic management, the resources boom and continuing low levels of debt has seen the currency remain stubbornly high. Call it the winner’s curse, if you will.

Not even worries about high levels of personal debt and wobbly property prices can shake the regard that foreigners have for Australia as an investment attraction. The breathlessly reported political crises, the debt shock, growth shock, and interest rate cut … all the reporting of the henny pennies and gloomsters are ignored by investors offshore.

And we have had no better example than the reaction to yesterday’s widely expected 0.25% rate cut. As a result, plenty reckon we will get more rate cuts from the Reserve Bank in 2013, but those forecasts ignore that the Aussie dollar rose to a six-week high of $US1.084 overnight Tuesday (and around $US1.460 early today).

The rate cut had no impact on the dollar, other than to force it higher. Some rationalised the rise by saying it was due to market relief that the RBA didn’t cut by 0.50% (like it did in May of this year). But that’s a load of tosh as the overwhelming consensus was for a cut of 0.25%, which is what transpired. The dollar’s rise was helped by what can only described as a surprise change in emphasis by the RBA and Glenn Stevens in his post meeting statement where further rate cuts were seemingly ruled out.

Stevens again pointed out that the dollar was still higher than current fundamentals for the Australian economy would indicate. He said the currency remained high “given the observed decline in export prices and the weaker global outlook”, which Lowe’s remarks echoed. But the markets are not listening.

Getting 3% in Australia seems to be smarter than chasing elusive returns in Europe, the US, Japan and in economies such as Brazil (facing its slowest growth in a decade), India (growth slowing), China (growth turning?) or Russia (growth slowing and politics fraught). Foreign bond purchases fell in the September quarter, but the dollar hardly moved because of demand from other buyers.

And finally, Lowe rightfully rejected Joe Hockey’s scaremongering that interest rates were at “emergency levels”. The cash rate was last cut to 3% in April of 2009 and Lowe pointed to the difference between global and local economic conditions then and now.

If you look at a couple of key commodity prices, you can see the absurdity of Hockey’s claim. The world iron ore spot price was strong yesterday; in April 2009 it was much lower, about $US56 a tonne. The global price of thermal coal is around $US83. In April of 2009 it was around $US68 a tonne. The ASX 200 was around 3,700 in April of 2009, it closed at 4,520 on Wednesday, a rise of nearly 25%.

Glenn - please read “This Time is Different” by Reinhart and Rogoff, and “And the Money Kept Rolling In” by Blustein. In every instance of history, the foreign lenders do eventually stop sending money and consequences can be dramatic.